Payment Choice and International Trade: Theory and Evidence from Cross-country Firm Level Data

When trading across borders, firms choose between different payment contracts. In particular, they need to decide whether payment takes place before or after delivery. Schmidt-Eisenlohr (2011) shows that this choice is relevant as it allows firms to trade off differences in financing costs and contract enforcement across countries and thereby has large effects on aggregate trade flows. This paper extends the model to allow for product complexity and uses data from the World Bank Enterprise Survey to test the main predictions. In line with the model, a larger share of international sales is paid after delivery (Open Account) if enforcement is weak and financing costs are low in the source country. The regressions confirm the prediction that contract choice in complex industries is more affected by enforcement, whereas contract choice in non-complex industries is more affected by financing costs.